Moody’s Investment Services, one of the nation’s major bond credit rating businesses, put out a report this week warning that dramatic growth of charter schools can undermine the financial footing of public school districts.

The report found that urban school districts already on shaky financial terms are most at risk of a downgrade in credit ratings from a sudden surge in charter school enrollment.

The dramatic rise in charter school enrollments over the past decade is likely to create negative credit pressure on school districts in economically weak urban areas, says Moody’s Investors Service in a new report. Charter schools tend to proliferate in areas where school districts already show a degree of underlying economic and demographic stress, says Moody’s in the report “Charter Schools Pose Growing Risks for Urban Public Schools.”

“While the vast majority of traditional public districts are managing through the rise of charter schools without a negative credit impact, a small but growing number face financial stress due to the movement of students to charters,” says Michael D’Arcy, one of two authors of the report.

Charter schools can pull students and revenues away from districts faster than the districts can reduce their costs, says Moody’s. As some of these districts trim costs to balance out declining revenues, cuts in programs and services will further drive students to seek alternative institutions including charter schools.

The report highlighted cities like Cleveland, Detroit, Kansas City, St. Louis, and Washington, D.C., all of whom have seen a rapid migration of students from traditional public schools to charter schools, which are funded with public money but run by a separate non-profit board of directors.

The Moody’s report found the school districts likely to suffer a negative setback are those unable to respond to drops in enrollment because of existing collective bargaining agreements (which North Carolina does not have) that make it difficult to downsize or if a state has a relatively lax application process for new charter schools.